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Virtues of diversification

December 15, 2008

Abstract: Crisis teaches us the virtues of diversification. This idea is illustrated for several entities – economies, sectors, companies and households. Among BRIC countries, over-dependence of Russia and Brazil on oil and commodities, engines of growth in good times, made them vulnerable to the global slowdown. China and India, where exports and domestic sectors provide diversification, proved more resilient during the 2008 crisis. similarly, among sectors, the US automobile companies that focused on large relatively fuel-inefficient SUVs faced collapsing demand when oil prices went up.

Specializing may be cost effective in boom times, but can potentially lead to bankruptcy when large buyers/ markets dry up when the business cycle turns. India’s IT services suffered due to overdependence on the US financial sector. Lastly, workers who migrate from villages to industrial and services jobs in cities but continue to maintain their rural links provide another positive example of diversification, as the risks of the urban job market are mitigated by the assurance of a subsistence livelihood from the village.

Keywords: diversification; risk and risk management; economic policies; firm strategy

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